Why Sandisk Stock Suddenly Crashed Today
Key Points
South Korea's stock market just blew up on worries over leveraged bets on Samsung and SK Hynix.
Single-stock leveraged ETFs track Sandisk, too.
Is Sandisk next to fall?
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Did the AI memory chip bubble just burst? Shares of memory specialist Sandisk (NASDAQ: SNDK) imploded Tuesday morning, falling 11% through 10:35 a.m. ET. And you can trace the origins of this sell-off straight to one place:
South Korea.
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Image source: Getty Images.
Big trouble in little Korea
Home to computer memory giants Samsung and SK Hynix, South Korea is the epicenter of money-making in the memory market. Problem is, gigantic profits earned on memory stocks this year have created a Korean stock market bubble, and it may have just popped.
Korea's Financial Supervisory Service (FSS) approved the creation of 16 "single-stock leveraged ETFs" in late May, all of which track Samsung and SK Hynix with 2x leveraged bets on the stocks' performance. When Samsung stock, for example, gains 1%, the ETF that tracks it should gain 2% -- but when Samsung loses 1%, the losses would be magnified just as much.
Think that might make the stock market more volatile? Well, that's exactly what's happening today -- but it's happening with the best intentions.
FSS Governor Lee Chan-jin now states that he wishes he had blocked the creation of these ultra-leveraged ETFs, which have tripled in size to more than $9 billion over the past few weeks, but are "high-risk products" bought primarily by individual investors gambling on market momentum. Today's warning attempted to cool things down -- but ignited a sell-off instead.
What this means for Sandisk
Similar concerns about Sandisk-leveraged ETFs may be adding to this stock's volatility today. More broadly, investors may wonder how much of the momentum that lifted Sandisk stock 4,700% in 52 weeks was investors buying Sandisk as an alternative to Samsung and SK Hynix shares?
If the price rises in Korea were produced artificially -- maybe Sandisk stock didn't deserve all its gains, either?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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